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China May Restrict Retailers

Beijing Considers Rules
That Would Limit Growth
Of Foreign Companies

By

Rebecca Buckman Staff Reporter of THE WALL STREET JOURNAL

Updated Dec. 11, 2003 2:58 a.m. ET

China is contemplating new regulations that could restrict the expansion of large foreign retailers such as France's
Carrefour SA
and the U.S.'s
Wal-Mart Stores Inc.,
amid aggressive growth of multinationals in the country and official concerns about overbuilding in the sector.

According to the state-run Chinese media, the government could soon crack down on foreign retailers that have "violated" current retailing rules, barring them from opening new stores and, in some cases, restricting them from making future investments in commercial companies in China altogether. The China Daily and official Xinhua news service said in recent reports that the new regulations would go into effect soon -- the China Daily said by Jan. 1. The newspaper also said China would establish new capital requirements for retailers.

An official at the foreign-investment administration department of China's Ministry of Commerce confirmed Wednesday that "we did circulate draft regulations for feedback some time ago." But he said, "now we're amending" them, and denied that the new rules would take effect Jan. 1. He declined to provide further details.

The draft regulations come amid the aggressive investment by foreign retailers in megastores across China in recent years. Chinese officials have expressed concern that the sector is overheating in general, and that foreign companies have circumvented regulations that require them to obtain central government approval to operate, in particular. Some companies, like Carrefour, had opened stores after signing agreements with local governments instead of Beijing. (Carrefour temporarily froze its China expansion plans for this reason, but has since resumed its expansion.)

The proposed rules are worrying some industry executives. The rules were one topic of discussion at a meeting earlier this week organized by two committees of the American Chamber of Commerce in Beijing, although the chairman of one of the committees, Herbert Ho, said he doesn't know the status of the rules. "We don't have much information," said Mr. Ho, director of government affairs for Amway (China) Co. One trade lawyer in Beijing, James Zimmerman of the firm Squire Sanders & Dempsey, said he worries many companies could be penalized by the new rules, if they go into effect. Carrefour in particular could be "a scapegoat," he said.

Carrefour, which has 41 stores in China, said it had received a copy of the draft regulations from the government, but declined to comment further. A Wal-Mart spokeswoman at the company's offices in Shenzhen also declined to comment.

The China Daily reported last week that Wal-Mart plans to open three new outlets in Shanghai, through a joint venture with a Chinese company.

The draft rules, officially called the Provisional Administrative Measures on Foreign-Invested Commercial Enterprises, are another example of the obstacles foreign companies still face in China, and the sometimes-mercurial foreign-investment policies of the government. Companies like Carrefour "were encouraged to move forward" by some Chinese officials, but then held back by others, said Mr. Zimmerman. Beijing's "own lack of transparency, and lack of specificity" on retailing and other laws have encouraged people to move into regulatory "gray areas" that could prove troublesome later, he added.

China's rules governing the retail sector are being gradually liberalized in line with Beijing's pledge to the World Trade Organization. But that hasn't stopped policy makers from throwing up other barriers against foreign investors.

In February, the government ordered all provinces and cities to submit detailed maps of planned retail sites and to tighten their systems for licensing new stores. It said that cities that don't comply wouldn't be permitted to apply for foreign-invested retail projects.

China's retail industry has seen rapid growth, largely dominated by big foreign names. Key Chinese cities are studded with megastores of companies such as Carrefour, Wal-Mart, Dutch chain Makro, a unit of SHV Holdings NV, and
PriceSmart Inc.
of the U.S. These stores offer a wide array of food and household goods at low prices, which appeals to China's growing consumer class.